What is the big toe, which can cause markets to crash?

What is the big toe, which can cause markets to crash?

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(BFM Bourse) – European indices fell sharply on Monday, one hour after the start of negotiations. An order entry error, commonly referred to as the “thick finger” in stock market terminology, is believed to be the cause of this wave of panic in European stock markets.

The first trading session of May had already started badly under the fears for the world economy, when the main European indices experienced a “lightning crash” around 10:00 am. It is the stock market equivalent of an air pocket, which ended as fast as it started. It took just four minutes for the quake to spread throughout the European financial world. The Nordic markets generally managed by the OMX Nasdaq (except Oslo, now owned by Euronext) were most affected. The prize goes to the Swedish index (OMX Stockholm 30, OMXS30) with a drop of 1.16% just before 10:00 am. and turns into a 7.71% drop a few minutes later, before the index rises completely. so fast.

Then the eyes immediately turned to the various European stock market players. The latter deny any responsibility in this morning “crash” after doing the usual checks. Traces of technical problem and attack on computer systems have been ruled out. The hypothesis of human error is therefore gaining ground. Investigations continued throughout the morning before OMX Helsinki, the Finnish stock exchange operator, announced the real reason for this violent fall. A human error would be the source of this wind of panic in the stock market. A market operator from the American bank Citigroup allegedly entered his order incorrectly.

The underside of a “thick finger”

This order entry error is commonly referred to in the stock market language as a “thick finger”. It can cause an avalanche effect on a particular security or even an index, because price fluctuations can trigger automated orders (for sale or buy) and automated trading algorithms tend to boost this kind of movement.

How are such slips explained? To simplify their daily routine, marketers use keyboard shortcuts that allow them to enter four zeros instead of one, for example. Lightning fast, an order of a few thousand euros can therefore turn into a large market of many millions or even billions of euros. An order expressed in euros can also suddenly turn into a yen in a moment of carelessness. Last month, Barclays shares, for example, fell nearly 10% after selling 48,000 shares. The bank’s market capitalization shrank by 3 3 billion, or more than. 3.5 billion, following a digital slide.

A little further in the history of the stock market, we can quote the mistake of an employee of Samsung Securities, in Seoul, in April 2018. Instead of paying each employee of the company a bonus of 1,000 won (0.76 euros), the accountant had pay, in all, 1,000 shares of the company, distributing the amount of 85 billion euros of non-existent shares. 16 highly reactionary officials had then resold these unjustified securities for a total of 150 million euros.

Closer to home, the latest case of the big toe recorded on the Paris Stock Exchange concerns LVMH. In March 2019, the title of the French luxury giant had fallen almost 9% less than ten minutes after opening for an inexplicable reason. The dissertation on the “thick finger” was considered credible.

And when it’s not the man in question, it’s the machines that take over. In 2012, Knight Capital Investment Fund came close to bankruptcy due to a computer error in its automated trading software. The new stock had sent anarchist orders for more than 140 shares on Wall Street, causing $ 440 million in losses for the stockbroker.

Safeguards are not always enabled

If this “slippery finger” makes you smile, it can have serious consequences despite the safeguards applied by stockbrokers to curb violent market movements. In France, for example, a stockbroker (Euronext) such as the Financial Markets Authority (AMF) may decide to suspend trading a stock (or even a CAC 40) under certain conditions, as noted on the website of the AMF. But these safeguards are not necessarily enabled.

As for Monday’s episode, affected investors will not have the opportunity to turn against the Nasdaq Nordic. The Scandinavian stock market operator said he had no reason to cancel the trades that took place during this violent fall of the indices.

Sabrina Sadgui

© 2022 BFM Bourse

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